What a breadth indicator is
– A breadth indicator is a quantitative tool that measures how many stocks are participating in a market move and, in some cases, how much volume those stocks are trading. It helps you see whether an index’s price movement is being driven by many individual issues or only a few large ones.
– Why that matters: strong market moves that include broad participation tend to be more durable than moves pushed by a small number of stocks. Conversely, when prices rise but participation falls, that “divergence” can be an early warning of weakening momentum.
Key types and how they differ
– Cumulative breadth indicators: these add each period’s net participation to a running total. The Advance/Decline (A/D) Line is the classic example.
– Non‑cumulative breadth indicators: these give an independent value for each period (for example, oscillators based on advancing/declining ratios).
– Volume‑based breadth: some breadth measures use volume rather than or in addition to counts of advancing/declining stocks (examples include On‑Balance Volume and the Chaikin Oscillator).
Common uses
– Confirming a trend: rising index plus rising breadth = healthier uptrend; falling index plus rising breadth = potential early bottom.
– Spotting divergence: index moves higher while breadth falls (or vice versa) can warn of weakening commitment.
– Measuring participation: shows whether many stocks support a move or whether it’s concentrated in a few names.
Worked numeric examples
1) Advance/Decline (A/D) Line — cumulative count example
– Formula concept: daily net advances = advancing stocks − declining stocks. A/D Line(t) = A/D Line(t−1) + net advances(t).
– Example (start A/D Line = 0):
– Day 1: advances 320, declines 180 → net +140 → A/D Line = 0 + 140 = 140
– Day 2: advances 210, declines 290 → net −80 → A/D Line = 140 − 80 = 60
– Day 3: advances 350, declines 150 → net +200 → A/D Line = 60 + 200 = 260
Interpretation: A/D Line rising from 0 to 260 shows expanding participation during the three‑day move.
2) On‑Balance Volume (OBV) — volume participation example
– Rule: if today’s close > yesterday’s close, OBV adds today’s volume; if today’s close 1 implies relatively heavier selling volume; TRIN < 1 implies heavier buying volume.
Example:
– Advancing issues = 1,000; Declining issues = 600
– Advancing volume = 800 million shares; Declining volume =
400 million shares
Calculation:
– Advancing issues / Declining issues = 1,000 / 600 = 1.667
– Advancing volume / Declining volume = 800m / 400m = 2.0
– TRIN = 1.667 ÷ 2.0 = 0.833
Interpretation: TRIN 1 means more stocks are advancing than declining; ratio < 1 means the opposite. Traders often use short‑term averages of the ratio to smooth daily noise.
D. McClellan Oscillator and Summation Index — momentum of breadth
– McClellan Oscillator: the difference between two exponential moving averages (EMAs) of net advances (commonly the 19‑day EMA minus the 39‑day EMA).
– Formula (conceptual): McClellan = EMA19(net advances) − EMA39(net advances)
– Interpretation: Positive values indicate breadth is accelerating upward; negative values indicate breadth is weakening. Crosses through zero are often used as buy/sell signals for breadth momentum.
– Summation Index: the cumulative (running) total of daily McClellan Oscillator values.
– Example: If yesterday’s Summation Index was 1,200 and today’s McClellan = +50, new Summation Index = 1,250.
– Interpretation: Rising Summation Index suggests long‑term breadth support for an uptrend; falling values suggest longer‑term deterioration.
E. New Highs − New Lows
– Formula: Net New Highs = #Stocks making 52‑week (or given period) highs − #Stocks making 52‑week lows
– Example: 60 new highs − 20 new lows = +40
– Interpretation: A positive net indicates more stocks are reaching new highs than new lows, which is constructive for the market. Divergences between the market index and new high/new low measures can signal topping or bottoming processes.
F. Percentage Above Moving Average
– Definition: The fraction of components trading above a given moving average (e.g., 50‑day or 200‑day MA).
– Formula: % Above MA = (Number of stocks above MA ÷ Total number of stocks) × 100
– Example: 300 of 500 stocks above their 50‑day MA → 300 ÷ 500 = 0.60 → 60%
– Interpretation: Readings near extremes (for example, below ~20% or above ~80%) can signal overextended breadth and potential mean reversion.
Practical checklist — how to use breadth indicators
1. Choose time horizon: intraday (TRIN), short term (A/D line, percent above 50‑day MA), or intermediate/long term (McClellan Summation Index, 52‑week new highs/lows).
2. Confirm trends: look for breadth to confirm price moves (index up + breadth improving = confirmation).
3. Watch divergences: index and breadth diverging (index new high, breadth lower high) is a warning sign.
4. Combine signals: use one momentum breadth indicator (McClellan) plus one volume‑weighted measure (TRIN or A/D line) to reduce false signals.
5. Check extremes and context: treat extreme readings as higher‑probability mean‑reversion signals, but verify with price structure and volume.
6. Manage risk: never rely solely on one breadth measure; use stop levels and position sizing based on your plan.
Worked example (combined signals)
– Situation: Large-cap index makes a new high today, but:
– A/D line failed to reach a new high (lower high),
– McClellan Oscillator has turned negative,
– % of stocks above 50‑day MA has declined from 70% to 45% over several weeks.
– Interpretation steps:
1. Price new high suggests bullishness.
2. A/D divergence and falling % above MA indicate participation is thinning.
3. Negative McClellan shows breadth momentum is weakening.
4. Conclusion (educational): The combination constitutes a bearish divergence in breadth that increases the probability of a corrective move.